Effect of Formal and Informal Institutional Indicators on Innovation Activities: An Empirical Analysis for a Global Sample.

In the current society, institutional quality is essential to innovation activity, as formal and informal institutions have a positive impact on innovation. Formal institutional quality establishes the intellectual property rights culture that lowers the transaction costs, required to stimulate the innovation process. Strengthen informal institutions inseminate mutual trust and cooperation, necessary to share the previous knowledge, which is mandatory to invent new ideas. Thus, this study aims to investigate the effect of formal and informal institutions and their indicators on innovation activities. We construct the indices to measure the quality of formal and informal institutions using data on 73 countries for the period 1981–2014. The system GMM estimation technique is used to predict the performance of formal and informal institutions on innovation activities. Besides, this study estimates the effect of each indicator of formal as well as informal institutions on innovations after controlling for FDI, human capital, trade and government size. The hypotheses of positive effects of formal and informal institutional quality is accepted. The size of the effect of different indicators of institutions are varying. The results are robust across developed and developing countries. From a policy perspective, this study suggests that more focused monitoring of institutions is required to improve their quality that ultimately effects innovation activities. [ABSTRACT FROM AUTHOR]